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Endologix Inc. (NASDAQ:ELGX)

Q4 2007 Earnings Call

February 21, 2008 5:00 pm ET

Executives

Paul J. McCormick - President and Chief Executive Officer

Robert J. Krist - Chief Financial Officer

Jody Cain - Lippert/Heilshorn & Associates Inc

Analysts

Shawn Fitz - Stephens Inc

John Putnam - Dawson James Securities

Robert Cvengros - Next Generation Equity

Bill Garrison - Ironworks Capital

Richard Riefler - UBS Financial Services

Operator

Welcome to the Endologix Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session.

(Operator Instructions)

I would now like to turn the conference over to Jody Cain. Please go ahead ma'am.

Jody Cain - Lippert/Heilshorn & Associates, Inc.

This is Jody Cain with Lippert/Heilshorn & Associates. Thank you for participating in today's call. Joining me from Endologix are Paul J. McCormick, President and Chief Executive Officer and Bob Krist, Chief Financial Officer. Earlier this afternoon, Endologix issued a press release announcing financial results for the 2007 Fourth Quarter. If you have not received this news release or if you would like to be added to the Company's distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and speak with Amy Higgins. This call is also being broadcast live over the internet at www.endologix.com and a replay of the call will be available on the company's website for the next 14 days.

Before we begin, I would like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of several securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Endologix Annual Report on Form 10-K and subsequent reports as filed with the Securities and Exchange Commission. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 21, 2008. Endologix undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

With that said, I would like to turn the call over to Paul McCormick. Paul?

Paul J. McCormick - President and Chief Executive Officer

Thank you, Jody. And I would like to extend my thanks to each of you for joining us this afternoon. Today, we are reporting our 12th consecutive quarter of domestic sales growth. US Powerlink System sales for the fourth quarter were $6.7 million, up 65% over the comparable quarter last year, and up 16% consecutively. Total product revenue for the fourth quarter is $7.9 million, increased 74% over the prior year.

For the full year 2007, total product revenue was $27 million, up by 87% from $14.4 million in 2006.

We achieved our 2007 revenue, gross margin, and total expenses guidance. Our success continues as our sales force expands the role for the Powerlink System. We are extremely pleased with our recruitment efforts during the past year and as of this call, we have 48 sales professionals on board. We have noticed the palpable difference on how the market places are viewing the sales opportunity of Endologix and this bodes well for the company.

Before I turn the call over to Bob Krist to review our financial performance, I want to comment on a recent article published in the New England Journal of Medicine that compared open surgical repair to the endovascular treatment of AAA. This was a significant paper in that researchers reviewed more than 45,000 Medicare records and came to three conclusions.

First, these findings support clinical study data showing that endovascular repair significantly reduces morbidity and mortality versus open surgical repair. Importantly, these findings are based on a patient population that typically has significantly higher comorbidity rates with endovascular repair compared with open work surgery.

Second, patients treated by endovascular stent graft were discharged to their homes in significantly greater numbers than those treated with surgery. This advantage has substantial clinical and economic benefits for patients and payors alike.

Finally, the study points to the fact that open surgical repair carries its own unique risk factors for re-hospitalization due to problems associated with the surgical incisions. Patients had to be readmitted over time for surgical complications associated with the laparotomy such as adhesions and bowel resections at a much higher rate than those undergoing endovascular repair.

The New England Journal of Medicine article underscores the significant clinical advantages of endovascular repair which we believe is on its way to becoming the standard of care for AAA treatment.

At this time, I would like to turn the call over to Bob.

Bob Krist - Chief Financial Officer

Thanks, Paul and good afternoon to all.

As Paul mentioned, our Powerlink System product revenue for the fourth quarter was $7.9 million which represented a 74% increase from 4.6 million in the fourth quarter of 2006. Domestic product sales alone increased by 65% to $6.7 million from $4.1 million in the 2006 fourth quarter and increased by 16% from $5.8 million in the third quarter of 2007. The 65% year-over-year increase in domestic sales was driven by a 14% increase in the number of covered sales territories and by a 45% increase in average sales productivity per territory.

International sales for the quarter were $1.2 million up 158% from $456,000 in the 2006 fourth quarter and up from $765,000 in the third quarter of 2007.

Total revenue including royalties was $8 million in the quarter.

Gross margin was 64% of total revenue in the fourth quarter and that was up from 59% in the prior year quarter and up from the 2007 third quarter comparable margin of 63% excluding a $500,000 license fee booked in that period.

The gross margin for 2007 fourth quarter included approximately a seven percentage point benefit from the utilization of ePTFE graft material produced in-house. We have now realized about 40% of the 1500 to 1800 basis points of margin improvement relative to the second quarter of 2007 that we expected from in-house production of our graft material. We anticipate the total benefit will be fully achieved within the first half of 2008. This substitution of in-house produced graft material also benefits our international gross margins which creates a more compelling business case for expanding our efforts there.

Consequently, we will continue to increase our focus on expanding our distribution outside the United States and we will add resources in 2008 to support this profitable growth.

Total operating expenses were $8.9 million in the fourth quarter compared with $7.9 million in the prior year quarter. That represented a 12% increase compared to the prior year a period over which domestic revenues grew by 65%. The increase was primarily driven by higher sales and marketing expenses, insurance and legal expenses and stock option expense.

Total stock compensation expense in the fourth quarter was $596,000 compared with $555,000 in the 2006 fourth quarter. The line item breakdown for 2007 was $41,000 charged to cost of sales, $113,000 charged to R&D, $277,000 charged to sales and marketing and $165,000 of stock option expense charged to G&A.

Interest income and other income totaled $230,000 in the quarter compared to $305,000 in the fourth quarter of 2006, and included an additional $72,000 of realized gains related to our investment in BioLucent. Overall, the net loss for the fourth quarter of 2007 was $3.5 million or $0.08 per share which compares with a net loss of $4.9 million or $0.11 per share for the fourth quarter of 2006. Per share stock-based compensation expense equaled $0.01 in the fourth quarters of both 2007 and 2006.

Turning to the full year of 2007, total product revenue was $27 million up by 87% from $14.4 million in 2006. Domestic revenue grew by 86% to $23 million and this was driven by a 28% increase in the number of covered sales territories and a 46% increase in average sales productivity per territory.

International revenue increased from $2 million in 2006 to $4 million in 2007. And total revenue including licensing and royalties was $27.8 million for the year. Gross profit dollars increased by 107% compared with 2006 driven by the 87% product sales increase, the $500,000 of BioLucent related license revenue booked in this year’s third quarter and by the 5 percentage point increase in the comparable period product gross margins.

Operating expenses for 2007 were $33.4 million, net of the $550,000 charge in the September to wind up our ePTFE supply agreement with CR Bard that represented a 22% increase from $26.9 million in 2006, primarily due to sales and marketing expense resulting from the 28% expansion of the sales force and the 40% increase in stock option expense. Exclusive of those items, the full year combined R&D and G&A expense actually decreased by 1% from 2006.

The net loss for 2007 was $15.1 million or $0.35 per share which compares with a net loss of $17.5 million or $0.44 per share for 2006. Stock option expense represented $0.06 per share in 2007 versus $0.04 per share in 2006.

During the fourth quarter, accounts receivable day sales outstanding averaged 54 days including both domestic and international accounts and was also 54 days at quarter end.

Inventory on hand improved to 8 months at the end of December compared to 11 months at the end of the third quarter. Total cash and marketable securities of December 31st was $9.2 million compared with $9.9 million as of September 30th. Consequently, the net reduction in cash during the fourth quarter was $638,000. This did include the $500,000 one-time license revenue that was triggered by the September acquisition of BioLucent by Hologic and also included approximately $412,000 of additional realized gains on our sale of Hologic stock in October. But offsetting these favorable cash effects we also made payments for outside purchases of ePTFE which domestic revenues grew by 65%. The increase was primarily driven by higher sales and marketing expenses, insurance and legal expenses and stock option expense.

Total stock compensation expense in the fourth quarter was $596,000 compared with $555,000 in the 2006 fourth quarter. The line item breakdown for 2007 was $41,000 charged to cost of sales, $113,000 charged to R&D, $277,000 charged to sales and marketing and $165,000 of stock option expense charged to G&A.

Interest income and other income totaled $230,000 in the quarter compared to $305,000 in the fourth quarter of 2006, and included an additional $72,000 of realized gains related to our investment in BioLucent. Overall, the net loss for the fourth quarter of 2007 was $3.5 million or $0.08 per share which compares with a net loss of $4.9 million or $0.11 per share for the fourth quarter of 2006. Per share stock-based compensation expense equaled $0.01 in the fourth quarters of both 2007 and 2006.

Turning to the full year of 2007, total product revenue was $27 million up by 87% from $14.4 million in 2006. Domestic revenue grew by 86% to $23 million and this was driven by a 28% increase in the number of covered sales territories and a 46% increase in average sales productivity per territory.

International revenue increased from $2 million in 2006 to $4 million in 2007. And total revenue including licensing and royalties was $27.8 million for the year. Gross profit dollars increased by 107% compared with 2006 driven by the 87% product sales increase, the $500,000 of BioLucent related license revenue booked in this year’s third quarter and by the 5 percentage point increase in the comparable period product gross margins.

Operating expenses for 2007 were $33.4 million, net of the $550,000 charge in the September to wind up our ePTFE supply agreement with CR Bard; that represented a 22% increase from $26.9 million in 2006, primarily due to sales and marketing expense resulting from the 28% expansion of the sales force and the 40% increase in stock option expense. Exclusive of those items, the full year combined R&D and G&A expense actually decreased by 1% from 2006.

The net loss for 2007 was $15.1 million or $0.35 per share which compares with a net loss of $17.5 million or $0.44 per share for 2006. Stock option expense represented $0.06 per share in 2007 versus $0.04 per share in 2006.

During the fourth quarter, accounts receivable day sales outstanding averaged 54 days including both domestic and international accounts and was also 54 days at quarter end.

Inventory on hand improved to 8 months at the end of December compared to 11 months at the end of the third quarter. Total cash and marketable securities of December 31st was $9.2 million compared with $9.9 million as of September 30th. Consequently, the net reduction in cash during the fourth quarter was $638,000. This did include the $500,000 one-time license revenue that was triggered by the September acquisition of BioLucent by Hologic and also included approximately $412,000 of additional realized gains on our sale of Hologic stock in October. But offsetting this favorable cash effects, we also made payments for outside purchases of ePTFE. The device looks and handles just like a standard introducer and is designed to simplify device introduction even in complex iliac anatomy. This design also permits the operator to completely remove the Powerlink delivery mechanism leaving the integrated hemostatic sheath in place to facilitate any catheter exchanges. This will further simplify any adjunctive procedures. We are excited about our plans to begin a limited US introduction of the Visiflex IS in the fourth quarter of this year.

All of these product enhancements and product line extensions underscored the fact that Endologix is continuing on the path to be a technology leader in this rapidly growing AAA market. If we are also looking to leverage our intellectual property and key competencies to develop new products to treat peripheral vascular disease outside of AAA these products are intended to open new markets for Endologix while utilizing our existing distribution channels. We will incubate two projects in the current year.

The first will evaluate the use of our Periflow technology as a drug delivery platform for treating peripheral vascular disease. As you may know, Endologix became a public company through a merger with Radiance CardioVascular Dynamics in May, 2002. In the early ‘90s, CardioVascular Dynamics had developed the Periflow technology, a proprietory double-balloon with a porous outer membrane. At that time, the company had investigated the delivery of heparin into peripheral vessels which proved ineffective as an antiproliferative agent. Today, we know drug-eluting stents utilizing paclitaxel, Sirolimus, and Everolimus can reduce re-stenosis in the coronary arteries but drug-eluting stents have failed to demonstrate efficacy in the peripheral arteries. We have been following some promising preliminary work on the rapid delivery of antiproliferation agents during angioplasty based on drug-coated balloons.

A February article in The New England Journal of Medicine reports on that progress. Our belief is that the Periflow Double Balloon Technology may be capable of more predictable substance delivery versus simply coating a balloon. Our ability to demonstrate the successful treatment of peripheral arteries particularly in those below the knee would be a significant breakthrough addressing a major clinical problem that has not been solved by balloon angioplasty, atherectomy, stents, or even drug-eluting stents.

We also plan to evaluate combination devices with our new ePTFE manufacturing. We have been reviewing some preliminary work utilizing ePTFE as a carrier for antiproliferative and antithrombotic substances to increase the patency of AV access grafts in patients undergoing dialysis.

We can incubate both projects within our R&D budget this year to determine our best product options for future clinical investigation. This underscores our corporate vision of developing innovative solutions for the treatment of peripheral vascular disease.

The Powerlink System gives us an outstanding entry into the rapidly expanding AAA market and we believe we can incubate products that will permit the company to participate in other large peripheral vascular markets as well.

Before opening the call to questions, I would like to affirm our financial guidance for 2008.

As announced in January, we expect total product revenue in 2008 to range from $39 million to $43 million. This represents a growth of 44% to 59% compared with total product revenue in 2007. We expect our 2008 gross margin to be in the 71% to 75% range, an increase of 900 to 1300 basis points over 2007.

Operating expenses for 2008 are expected to range from $35 million to $39 million representing an increase of just 6% to 18% over 2007, and it should be noted that we estimate $5 million to $5.5 million in non-cash expenses. We expect that most of the increase in cash operating expenses this year will be primarily in the sales and marketing arena.

Additionally, we are affirming our belief that our financial resources are sufficient to support our sales force in our current R&D activity and as Bob mentioned, to see us through to becoming cash flow positive from operations in 2008.

In closing, we are making excellent progress towards our goal of leadership in this fast growing AAA market. We expect to benefit from the increased tenure of our sales representatives and are highly encouraged by the quality of professionals we are tracking to our sales team. In addition, we expect the limited introduction of the next generation Delivery System the Visiflex IS in the US end of fourth quarter of 2008. Our proven ability to manufacture ePTFE material is expected to dramatically lower our cost of goods and increase gross margins.

We continue to be enthusiastic about our distribution partners for the Powerlink System in key European markets as well as in Latin America and we are excited about our Japanese Powerlink System launch.

Importantly, we are well-positioned for future growth and market share gains. We are building sales momentum. We have the best in class clinical data to support the Powerlink System use and we are developing and introducing cutting edge technology this year to further simplify our minimally invasive AAA procedure.

With that said, I would like to thank you for your attention and open the call for your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions)

One moment please for the first question.

Robert J. Krist

While waiting for the first question, I would like to comment on that we recently participated in the International Congress which is held annually in Phoenix, Arizona. Two presentations feature the Powerlink System. The first was titled “Endovascular Aneurysm Repair in Difficult Proximal Necks” and was presented by Professor Dieter Raithel of Nuremberg, Germany. He reviewed his experience of 492 Powerlink System cases focusing on the Powerlink successful performance particularly in the utility of the Powerlink in patients with anatomy that is considered unfavorable for EVAR. We believe that this types of reports help physicians expand the role for EVAR.

The second presentation was by Dr. Zvonimir Krajcer an interventional cardiologist of the Texas Heart Institute and was titled “EVAR with the Powerlink Using a Bilateral Percutaneous Approach in Local Anesthesia”. Data from a single-site series of 28 patients demonstrated a feasibility of an all percutaneous delivery of the Powerlink. Incredibly, this approach resulted in an average hospital length of stay of just one day. Improved procedural and hospitalization times further makes the case for EVAR for the majority of patients.

Operator, we are ready for the first question.

Operator

Our first question comes from the line of Shawn Fitz with Stephen’s Incorporated. Please go ahead with your question.

Shawn Fitz

Bob good afternoon.

Robert Krist

Good afternoon Shawn.

Shawn Fitz

Just quickly, back to the New England Journal of Medicine study, Paul could you describe maybe to us the impact that you think this is having or could have in the future within the physician community as it relates to thinking about an EVAR approach to AAA versus open?

Paul McCormick

Yeah, I think frankly some of the barriers… I will put it this way, patients more and more are requesting the minimally invasive approach and they go pretty well prepared to their primarily vascular surgeon to discuss this as an option. So, as more of this type of scientific literature gets out there, it becomes a more appealing procedure. In addition for those physicians, the rap has always been what is the durability of the minimally invasive approach and no one really looked at the re-intervention rates first for problems associated with the AAA open repair because they do get problems associated in secondary procedures. But more importantly, nobody was really looking at the number of times physicians had to re-hospitalize patients for problems associated with the laparotomy itself which can lead to adhesions and bowel resections, so it was never looking at the technology in a kind of equal fashion. So I think it has a positive impact both for physicians. I think it has a positive impact for patients evaluating what their options ought to be because it gives a much clearer look at the problems associated with open repair, and then frankly for payors alike, when payors look at data such as this particularly in a capitated system, it becomes a very.compelling story for the minimally invasive approach. So, I think it is over all a net positive from a lot of different perspectives.

Shawn Fitz

Okay, great. Paul, in the fourth quarter some of the hard work that you guys have done on the sales force side domestically really begun to manifest themselves in some strong domestic sales force productivity trends. Are you guys seeing that strength and those trends carrying in 2008?

Paul J. McCormick

Yes. And I think a lot of it has to do with some of our recruiting. We have lost 14 reps or 15 reps since May 31st . The average tenure for those 15 was about 12 months.

And none of those were particularly surprising. It is probably fairly close to a normal turnover for a company at this stage. But the available talent now is very different than it had been two years ago. As an example, out of the last 10 hires, 6 have come into to Endologix with AAA stent graft sales experience. And so it would not surprise me to not only see the turnover rate decrease over the next 12 to 24 months but our expectations as we will see improved productivity as our reps become more tenured and that some of the talent that we have been able to recruit over the last 12 months comes up to speed faster. And part of that is also fueled by just…, we have been in front of physicians for some time now. Endologix is not going away. And so it reinforces that message which we believe will result in improved productivity.

Shawn Fitz

Okay. Great. Bob, I believe you referred to maybe some additional resources being put into your international distribution. Could you maybe flex that out specifically in terms of what the game plan is there? Maybe what markets? And then more specifically, if that means more resources, I guess more spend on the operating expense side.

Robert Krist

By more resources, I am not suggesting that we are going to have any direct representation in these countries just a couple of additional folks to keep our distributors focused and keep that line of communication open and supporting their efforts in those countries. So, as Paul mentioned, a new Marketing Manager positioned in Florida to provide closer support for Latin America and an individual in-home office here with a more particular focus on the development of additional approvals in new countries, and coming behind that potentially with distribution partners in those markets. But we are talking a couple of folks.

Shawn Fitz

Okay Great. And then Bob, last question. You indicated your cash burn was about $1.3 million in the quarter. If we were to look at that on a normalized basis, looking at some of the non-recurring stuff, is that kind of cash burn that would be on a sustainable go forward basis, excluding some one time or non-recurrings?

Robert Krist

That was before the fourth quarter, adjusted to reflect a normalized perspective but there is an improving trend line occurring even within that short period of time. So, it was $1.3 million on a fair adjusted basis in Q4 and its moving in a positive direction toward breakeven.

Shawn Fitz

And Bob, could you refresh my memory on what the cash burn was in the third quarter of 2007?

Robert Krist

I believe, it was in the $3 million zone but I will check it for you and come back to you in between further questions.

Shawn Fitz

Bottom line is that it stepped down significantly from the third quarter and that is the directionality. We should see it continue throughout the rest of this year then, right Bob?

Robert Krist

That’s correct.

Shawn Fitz

Ok. Thanks, guys.

Robert Krist

Thank you.

Operator

Our next question is from the line of John Putnam with Dawson James Securities.

John Putnam

Thank you very much. I wonder, Paul, if you might give us some metrics in terms of how many hospitals you sold to in the US in 2007 and maybe the metrics of how many of those hospitals represented the largest portion of your revenues.

Paul J. McCormick

Yeah, we will send our largest customers over to Medtronic and Cook. We will identify them for those. Now in the last 12 months, we sold into 380 accounts.

John Putnam

Ok.

Paul J. McCormick

with 80% of the revenue derived from about 40% of those. So we are clearly seeing, good product uptake by clinicians where we have tenured reps and we are starting to see an impact of our sales expansion. I guess what is interesting is based on our Q4 domestic sales we probably have around 8% of the total domestic market while only selling at about 32% of the total accounts. And what is striking is that when we look at 80% of our revenue, it is being derived by sales to only 13% of the accounts across the nation. So we have a significant upside where we are clearly getting higher market share where we have tenured reps with clinical relationships so we have a lot to build on but long way to go yet.

John Putnam

That is great. I wonder if you could somehow give us some idea of what additional opportunities there are from market share point of view with the new indications? What I am asking is without us how much of the market do you address and with them how much more of the market do you address?

Paul J. McCormick

It gets a little dicey because a good part of our business is coming from cases that position our interest in the technology because they were to send those patients to open repair. So lower taking share from other competitors, I think the Powerlink is actually attracted to physicians who want to learn this because they believe they can treat patients with endoluminal graft they could not with the others. You got to balance that off when we say what percentage of the market because there is clearly cases that we do not believe can be treated with other devices. When you look at things, such as once we get our first large diameter technology, that is 10% to 15% of the overall market, I think. Right now, Cook probably has the lion’s share of that because they have devices that go up to larger diameters but are constrained by certain angulation requirements. And then as we look at… We are filing for these extensions for concomitant iliac artery aneurysms, patients who have AAA aneurysm in their iliac. Sure, it could be another 3% to 5% of the market depending on the anatomies.

So, those are the types of things that we just keep building on the line extensions based on the input of the physicians.

John Putnam

Thanks a lot, Paul.

Paul J. McCormick

You bet. Thanks John.

Operator

(Operator instructions)

Our next question is from the line of Robert Cvengros with Next Generation Equity Research.

Robert Cvengros

Hey Paul, Bob.

Robert Krist

Hey Bob.

Robert Cvengros

I am just trying to get my hands around the EVAR Study from the New England Journal Medicine. From an inflection point, your sales reps are allowed to go out and drop off reprints at the physicians’ offices, correct?

Robert Krist

Provided we buy those. Otherwise, there is copyright.

Robert Cvengros

No. Of course. In respect to that, and the customer on the other end, the surgeon, most of your surgeons will do both EVAR and open surgery, correct?

Robert Krist

Absolutely.

Robert Cvengros

Ok. Have you seen any marketable shift or a shift as of yet, I know it is fairly recent right now but are you starting to see any just out of the park, out of the dark just shift over to like EVAR from open surgery?

Robert Krist

Not because of that.

Robert Cvengros

Okay.

Robert Krist

I think more effective is papers that were presented like the one at the International Congress where Dietre Raithel is showing how the unique aspects of the Powerlink allow physicians to treat complex anatomy that they may be resistant to try with stent grafts although, they have patients that have comorbidities that they prefer not to do surgery. I think things of that that show clear clinical utility probably are a much more effective tool. Certainly the New England Journal of Medicine has a positive overall impact. Probably vascular surgeons (inaudible) their head, maybe never quantified it, but understand the problems associated with open repair.

I think as patients and payors understand it better. It is going in the right trajectory. But I would not expect to see a major shift because of that paper.

Robert Cvengros

In respect to ASP, I was wondering how stable is that during the year or the quarter?

Bob Krist

Very stable.

Robert Cvengros

Okay. And regarding some of the research initiatives of R&D, the peripheral vascular…

Bob Krist

Yes.

Robert Cvengros

Is that going to have any impact upon R&D number towards the latter?

Paul McCormick

No. All the incubation … We have already had some of the products, we have already built. The goal will be to do some early animal work to see if we can settle on how we want to investigate this. I think the big issue though this all goes back to how we want to monetize. We have significant intellectual properties as you saw last year when we licensed out some of our IP to BioLucent that resulted in some significant cash inflows. We licensed it in that situation because it did not fit within our corporate vision of focusing on peripheral vascular. That was for brachytherapy following lumpectomy of the breasts. But if we can, in fact, leverage in-house some technology for future products as opposed to having to acquire technology at some future period, there is significant upside in the fact that Radiance, which is the predecessor of Cardiovascular Dynamics, which was the predecessor to Radiance has this type of IP, makes it very interesting particularly in light of this most recent New England Journal of Medicine article looking at the drug delivery of paclitaxel by a coated balloon. We had been following some of that early work and then just recently it had been published in New England Journal of Medicine showing that, in fact, you could deliver paclitaxel in a local quick fashion. Drug-eluting stents have not been shown to be as effective in the peripheral vascular. So things of that nature, the ability to manufacture our own ePTFE and do some things, there is some work out there with the combination of drug and ePTFE. So it gives us this ability to incubate this as we look forward to future growth drivers. So it is an exciting time for the company.

Robert Cvengros

Exactly. Bob, this one is for you. Is ePTFE, sorry about that, I must have missed this one but you said the effect upon margins were what in the fourth quarter?

Robert J. Krist

About seven points.

Robert Cvengros

Okay. And going forward, that would be fully effective?

Robert J. Krist

We would get to the fifteen, the eighteen points approximately within the first half of this year.

Robert Cvengros

Okay. All right. Thank you very much. Very good.

Robert Krist

Thanks Bob.

Operator

Our next question is from the line of Bill Garrison with Ironworks Capital.

Bill Garrison

Thank you. I wonder just to see if you could expand a little bit on a couple of figures you presented earlier. I guess to the extent you are generating 80% of your revenue from the 40% of those hospitals you are currently selling into. In terms of additional gains there, how close to full utilization are those reps in that part of your market?

Paul McCormick

Yeah. There are very few reps that are at full utilization. Frankly, there is a couple that are may be pushing that ceiling and in situations like that we may evaluate adding a clinical specialist or things of that nature so very few of our reps are at the ceiling.

Bill Garrison

Okay. And I know in the past you have talked a little bit about some of the characteristics in terms of tenure and things like that with the sales rep. Are you providing those kinds of details at this point or are you trying to stay away from that detail?

Paul McCormick

Well, I mean, the trouble is it now starts to get a little, it may not be as straightforward as you would like as far as being helpful. I mean, we have some turnover. We have been able to, what I think, recruit very strong people but in just general terms, almost half of our sales force has less than one-year tenure. But we are seeing productivity gains to some extent, frankly is because the type of people that we are able to recruit today has been very strong. I think the opportunity Endologix, its culture, its economic, its clinical opportunity is very attractive to the type of rep who likes to be involved with a clinical sale. Many medical device jobs frankly have evolved into bringing in lunch in a service and all those things are very positive however very few technologies, sort of like the orthopedic implants, where reps are more engaged and that is attractive to a certain profile, and we have been able to attract that kind of profile to Endologix, so it is an exciting time from that standpoint.

Bill Garrison

And among the half of the sales force that is relatively new, maybe a quarter to a half of those have AAA stent experience?

Paul McCormick

I will tell you that on the last 10 we have hired, 6 came over with AAA stent graft sales. One, the seventh rep, although he had sales experience with another medical device came out of a clinical role where he was actually involved with implanting these things. So it is. It is an exciting time to be recruiting for Endologix.

Bill Garrison

Okay. Thank you very much.

Paul McCormick

Thanks Bill.

Operator

There are no further questions at this time. Please proceed with your presentation or any closing remark.

Robert Krist

Before Paul closes the call, I do want to close the loop on Shawn’s question regarding the cash burn for Q3 of 2007. Shawn, it was $2.9 million.

Paul McCormick

Okay. There may be just one other question pop up.

Operator

Our next question is from the line of Richard Riefler with UBS Financial Services.

Richard Riefler

Hi Paul. Great job by the way. I just wanted to find out if you could break down your ’08 guidance geographically for us to let us know what is going to come in domestically, what comes from Latin America, Japan and Europe?

Paul McCormick

Yeah, we have not broken that out on our guidance.

Richard Riefler

Could you just comment or give us a little color on what you think the impact Japan might be, is it built into the number or…?

Paul McCormick

Japan is built into the number. Keep in my mind it is modest. Anything international is going to, we have to understand we probably have a transfer price of one-third or so of what we sell in the U.S. Yeah one-third to a half, something in there, so from a unit standpoint, the number of cases getting done, it does not have quite the same import as in the U.S. The U.S. clearly will be the largest contributor to our sales number.

Richard Riefler

Okay. Great.

Robert Krist

All right.

Richard Riefler

Thanks.

Operator

And there are no further questions as this time.

Paul McCormick

Well, let me, once again I would like to thank everyone for joining us today, for your questions and for your support. We are committed to expanding the market for the Powerlink System and are investigating innovative solutions for minimally invasive AAA treatment. If you have any additional questions, please call either Bob or me and we look forward to keeping you apprised of our progress and thanks again for your interest in Endologix.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines at this time.

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Source: Endologix Inc. Q4 2007 Earnings Call Transcript
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